For $24 Billion, Michael Dell Has Bought Two More Years

Dell Chairman and CEO Michael Dell. Photo: Dell

Michael Dell has two more years. If history is a guide, that’s about the span of time his new set of investors will give him to transform the flagging company that bears his name. On Tuesday Dell announced that he had put together a $24 billion deal that includes cash from Silver Lake Partners, and financing from four banks and a $2 billion loan from longtime Dell partner Microsoft. Dell is also ponying up his own 16 percent share of the company.

It’s a massive deal, and a huge bet by Dell himself that could make him far richer than he is today – if it pans out. But so far, not much Dell’s been doing has been catching fire.

Let’s not forget that Dell came back to take over the CEO reins of his company in 2007. He has had about six years to transform his company, and it hasn’t worked. Dell stock has lost half its value during that time, while Dell’s share of the global PC market has dropped from about 14 percent in 2007 to an estimated 11 percent in 2012 according to IDC Worldwide Quarterly PC Tracker. Sure the PC industry is suffering overall, but Dell is sucking wind more than most.

The argument that going private will free Dell from the three-month time horizons that Wall Street cares about is a fair one. Disc-drive maker Seagate, another Silver Lake deal, used the cover of going private to its advantage in 2000. Initially it benefited from going private by avoiding a huge capital gains tax hit by selling its share of storage software company Veritas back to Veritas. (Symantec bought the company in 2005.) So there was a component that was purely financial engineering. But it wasn’t all about accounting tricks. By the time Seagate went public again in 2002, it had shed non-core investments in software and other storage technologies, and finally made a big move into the then-hot notebook-storage market. Seagate had a successful IPO, and a pretty good run in the next few years before flash storage started to steal its margin and business. (There are rumors every year or so of trying to take Seagate private yet again.)

Like Seagate, Dell could squeeze a fair bit of tax benefit from this private deal especially when it comes to repatriating the offshore cash it has socked away, as detailed in this Slate story, but also like Seagate, there is much more to it. Dell can try experiments and fail without a huge hit to stock price. Perhaps more importantly, the increasingly loud drumbeat in the media that his company can do no right will recede for a time. As a private company, Dell can stay in low-margin businesses, like the consumer PC business, or he can jettison it entirely without fear of Wall Street’s retribution. Dell can double down on his company’s more healthy server business, and look for more margin in professional services. He has moves he can make; he just needs to commit to them.

This going-private business isn’t about whether Dell the company survives, says Crawford Del Prete, chief research officer at IDC. “I don’t think Dell’s viability has ever really been in question,” Del Prete says. “Dell has been trying to mix up all the parts since he came back, but it has proven to be very difficult to transform the company and become something different.”

That is exactly what Dell has two years to pull off. He and his company need to emerge from this private sojourn a different company. And to do it, Dell the man needs to summon some of the fire and creativity that built his company and made the Dell business model so famous every competitor on the planet copied it.

Cindy Shaw, an analyst with San Francisco-based research firm Discern, says that one of the most promising scenarios she can imagine is Dell rethinking the business model for enterprise IT the same way he rethought the PC business. “It may stray from its recent emphasis on intellectual property to embrace open source computing,” Shaw says. “Riding the wave of new industry standards as it did with PCs so many years ago.” Just as Dell undercut the entire PC business with its cheap built-to-order machines, Shaw imagines it as a low-cost provider of all kinds of IT services to win business from companies including Hewlett-Packard, EMC, NetApp, Oracle, Cisco and VMWare. “Dell may accept low margins on many or all of its innovative products and services in the short term to build market share,” Shaw says. “With the side effect of being able to expand margins and this boost EPS growth as it prepares for an IPO.”

Wait, IPO? Wasn’t this about going private? It is, but of course the whole point of taking Dell private is to prep it to go public again. Assuming current shareholders don’t block the privatization and drag things out, Dell could conceivably be ready to hit the public markets again sometime around the fall of 2015. As former Seagate CEO Bill Watkins told Fortune in 2006, “When you go private, the only thing you think about is going public again.”